Production numbers big issue for cotton

The big issue for the U.S. cotton market for 2006 remains the production numbers, with weather-related uncertainties still looming.

“Current estimates call for 20.5 million bales,” says Steve Martin, Extension economist with Mississippi State University. ‘That's not far from where estimates have been for this entire growing season. Most who follow the cotton industry would suggest that is an over-estimate, primarily due to what is going on in Texas.

“I think that number will be reduced, but it may take a couple of months of USDA estimates to get there. But I don't think it will be as low as a lot of people have suggested.”

Martin presented the U.S. cotton market outlook during the 2006 Southern Region Agricultural Outlook Conference, held recently in Atlanta.

“Some of the lower estimates are wishful thinking,” he says. “Everyone has been expecting cotton prices to increase throughout the growing season, but they haven't been able to do that. A lower production estimate should be a plus for prices. We had 23, almost 24 million bales of production last year.

“In March and February, we were saying that planted acres actually were higher than last year. We have three million bales less than last year in terms of production, but we have more planted acres than we've had in the last two years.”

In terms of yield, U.S. growers set a record in 2004 and were slightly below that in 2005, he adds. “Current estimates put us right at 700 pounds for this year. Historically, that's a pretty good yield estimate, at least for now, and acres are up this year,” he says.

There is a fair amount of abandonment already factored into the USDA estimates, says Martin, although not quite as much as in 1997 or 2000. “I'd say production might end up somewhere around 20 million bales. Right now, total supply is about 26 million bales. Looking at how that stacks up with the last couple of years, it's actually lower than the 2004/05 number and a little lower than last year. All of this would suggest that maybe we'd have somewhat better prices,” he says.

Even with three years of data, there's still some uncertainty in the U.S. cotton market, says Martin. “Looking at USDA's supply and demand balance sheet from the 2004/05, 2005/06 and 2006/07 marketing years, beginning stocks for the 2006/07 forecast are roughly 6 million bales, up some from last year, when they were 5.5 million bales and significantly more than 2004/05, when they were 3.45 million bales,” he says.

Turning to demand, the current estimate for domestic use is about five and a half million bales, says Martin. This is down from last year and continues a downward trend from the past several years.

“If there's anything positive to say about domestic use, maybe it's that it possibly has plateaued, and that it'll stay at that level for the next few years,” he says.

U.S. exports for this year are estimated at 16.2 million bales, according to Martin. Last year, it was 17.5 million bales.

“Oftentimes, we see market outlooks and they tend to be export analyses — what's going on in the export market. We lose sight of the fact that we grow a crop, use whatever we use, and then export the rest of it. It may take a year or 15 months to do it. Exports tend to be a function of how good our crop is. The question is, what price do we need to move it? We're going to export whatever we don't use.

“Under the current scenario, the fact that we have a lower forecast in terms of exports now is as much a function of the fact that we have a smaller crop as it is an indication of the current demand. We have less to export, and the discontinuation of the Step 2 Program probably shifted about one-half million bales from 2006-07 back to last year.”

As U.S. mill use has decreased, exports have increased, he says. “We've been very fortunate that China has come on with such a strong demand, and that has supported our prices. We would have been exporting it anyway or cutting back on acres. We probably would have had lower prices without China's demand. Over the past two or three years, our prices have averaged in the 50-cent range, which is nothing to get excited about. But if we had not seen the demand coming from China and Asia, prices would have been even lower.”

The U.S. cotton exports situation probably has more to do with Brazil filing the WTO case against the United States as did farm programs, says Martin. “If we still were using 12 million bales domestically, I doubt they would be challenging our farm programs. Looking at the past 20 years or so, we have increased exports and production, and I don't know if our farm programs are the cause of that because everyone else has increased their production as well. The only thing that has kept prices in as good a shape as they are has been increased world consumption in the past two or three years.”

A total use estimate of 22 million bales, he says, leaves ending stocks at 4.6 million bales, a reduction from the past couple of years. Historically, this ending stocks number is about average,” says Martin.

“In terms of getting more money out of the 2006 crop, I don't see a substantial rally giving us more than a few cents,” he says. “We should have full counter-cyclical payments for the 2006 crop. We could get rallies in some of the grain markets related to renewable energy that would result in the need for cotton prices to rise in order to attract acres in 2007.'

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